An
announcement in Autumn Statement 2015 suggests that there may be substantial
changes coming in April 2016, which may seriously impact on the matters
discussed in this page – see here for the
latest available information.

This
restricts the total amount that can be taken as a capital distribution (to
which CGT / ER will apply) without going through a formal liquidation procedure
(and with the associated cost) to £25,000.

If
there is more than £25,000 retained profit in a company, care needs to be taken
to avoid it all being subject to IT at the highest rate.

A
change in practice announced by the Treasury Solicitor’s department on 13th
October 2011 now means that it is now also necessary to consider reducing the
issued share capital to a nominal value before closing a company down by this
route.It’s not a big problem, but must
be done in the right way.

Background

It is generally accepted by
professionals specialising in this field that, other considerations permitting,
it is wise for the Contractor to change his/her company every few years, in
order to help close the door on risks of backwards investigations (particularly
in relation to expenses & IR35), and thus significantly help in
ring-fencing today’s profits against residual risks of yesterday, and reducing
the risks of personal claims by HMRC against the directors arising under
PAYE.

Whilst at present s660A
appears to raise less concerns following the final disposal of the Arctic
appeal in July 2007, it should not be disregarded, and the goalposts may well
move again with 'income shifting' rules. Viewing the position overall,
such a close-down and restart can also often offer opportunity for
restructuring in a more secure way.

Where there are accumulated
profits in the company, a greater need for the security of such ring-fencing
may be felt, together with a natural desire to extract those accumulated
profits; there is also the disincentive of the potential tax consequences
of extraction. Extraction of retained profits into a safer environment
may be wise, whether or not accompanied by a close down.

As we see it, there are
generally the following options:

Option 1extract as dividend

–tax
bill for 25% of the extracted surplus (may equally be expressed as 32.5% of the
grossed up dividend), assuming shareholder(s) already in higher rate tax
bracket – more if in the top bracket (and
these rates change with effect from April 2016, with the introduciton of
Dividend Tax)

–this
approach may be taken to extract the profits, whether or not the company is
closed down.

Option
2(closedown only) - take advantage of what is now
s1030A CTA 2010 (which can allow total distributions of no more than £25,000 on
dissolution to be treated as a capital gain)

–there
are still some potential anti-avoidance pitfalls which need to be steered clear
of,
and these are now less obvious than they were under ESC C16

–annual
CGT exemptions and CGT loss relief are available, to the extent that they are
unused elsewhere

–Enterpreneur’s
Relief may be available (see notes below) - Where shares have been held for
more than 1 complete year, and other applicable conditions are satisfied, the applicable
tax rate may be 10% and not the basic CGT rate (currently 28%)

–there
is some advantage to planning ahead (eg it may be possible to spread the
capital distribution over 2 tax years, and so claim 2 years’ annual CGT
exemption)

Option 3(closedown only) – put the company
into formal members voluntary liquidation

–this
requires the engagement of a liquidator, at a cost.It takes a little time

–there
are still some potential anti-avoidance pitfalls which need to be steered clear
of

–Enterpreneur’s
Relief may be available (see notes below) - Where
shares have been held for more than 1 complete year, and other applicable
conditions are satisfied, the applicable tax rate may be 10% and not the basic
CGT rate of 28%

–there
is some advantage to planning ahead (eg it may be possible to spread the
capital distribution over 2 tax years, and so claim 2 years’ annual CGT
exemption).

Where there is more than one
shareholder, the consequences for each need to be considered separately, before
a reasoned decision can be taken as to the best overall approach.

There may be other options -
much depends on details which change from situation to situation, and on the
wishes and intentions of the individual(s) concerned. For example,
overseas connections / future intentions can open up other avenues.

In general terms, where the company is to be closed down,
then it is wise to evaluate all the options, and consider anti-avoidance
provisions.

We have developed a tool which
helps us to assess each possible option, taking into account the position of
each shareholder, and thus to help us put you in a position to take an informed
decision as to your best route forwards.

We will respond promptly,
and will give an indication of how we may be able to help, and (if so) tell you
what is required to take it a stage further.

Advice on availability of Entrepreneur’s Relief is also available
- mail
us, and please let us have the information as listed above.

Emigrating - or going home?

Finally, if your planned
company closure is intended to synchronise with moving to another country,
there are other considerations to take into account.

There are particular angles
to consider for those returning to Australia.

We can help with all the
situations.

Note on Entrepreneur’s relief: The effectiveness of closing
down the company depends on whether or not full Entrepreneur’s relief is
available.

Entrepreneur’s relief is available on qualifying
business disposals by individuals - in the case of shares in an unlisted
company, this requires the company to be a ‘trading company’. Where at
least 5% of the issued shares in a company, carrying at least 5% of the voting
rights, have been held for more than one complete year, and the individual has
been an officer or employee of the company throughout that period, then on the
face of it Entrepreneur’s Relief is available.Whether or not a company is a ‘trading company’ depends on rules similar
to those which formerly applied for business asset taper relief.

The consensus amongst professionals appears to be
that there is unlikely to be a problem with the Revenue accepting that a
company is a trading company where

non-trading
income does not exceed 20% of the company's income, AND

surplus
does not exceed annual turnover, and

surplus
does not exceed ₤100k.

The further one steps outside those boundaries, the
greater the risk that Entrepreneur’s Relief may not be available; each
case needs to be considered on its merits. Time is also a consideration,
where a company has in effect ceased to trade – the longer one leaves it, the
harder it may be to justify a position that the company remains a ‘trading
company; for these purposes.

It is NOT generally possible to apply in advance for
Revenue clearance to plans on this issue before committing oneself to
implementing them.

Disclaimer of liability:The information on these pages is provided
free and for information only, and is provided 'as is'. Whilst believed to be
correct, it is in no way comprehensive. It is provided for your interest only and
is not intended to be relied on as formal legal advice. The posting of
information on these pages is not intended to create a lawyer-client
relationship, and you should not act or rely on this information without
seeking professional advice. No liability is accepted therefore for any errors,
or for any losses that may be incurred if it is relied on.

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